Beware of Where: Choice of Law and Related Contract Provisions

You may have noticed language in contracts that speaks to where potential disputes will be handled and which state’s laws governs those disputes. Contracts will often spell out where cases must be filed (the choice of forum1), the law that must be applied (the choice of law2), and the court that will have the authority (jurisdiction3) to hear the case.

Choice of forum can be important. If you have to go to court in a distant place, it adds to the cost and inconvenience of a lawsuit, which may make you consider settling sooner. The choice-of-law provision can also be important because laws vary between states, and the law a court will choose to apply isn’t necessarily the law of the forum state.4

Choice of jurisdiction relates to whether a particular court has authority in a case. In order for a court to have jurisdiction over a party, the party must be physically present in the state or, if out-of-state, have “minimum contacts” with the state.5

Whether a party has “minimum contacts” is determined by the depth and range of activities done in the state. For instance, a California company may meet that standard for New York if it has a facility in New York and employs representatives there who service New York residents.6 Entering into a contract with an out-of-state party does not automatically mean you’re subject to the jurisdiction of the other party’s forum state,7 but you’re more likely to be subject to outside jurisdiction if you got some benefit from the contract, directed your actions towards the other party (e.g. your work is done with the goal to please a client), and got notice from the contract that you could be served.8

When a contract specifies a choice of forum, a choice of law, and jurisdiction, the goal is to give the parties greater certainty about these issues. For example, what happens when a dispute arises between parties located in different states? Without such provisions, it may not be as clear in which court and in which geographical area a dispute should be handled. As a result of these provisions, the parties are essentially waiving their rights on where to sue and agree to bring suits in a particular forum,9 as well as set their choice of law.10

Recap

Choice of forum (where cases must be filed) can be important since it takes more time and money to go to court far away.

Choice of law (what law will govern the case) can be important because state laws vary and one may be more favorable to you than others.

Choice of forum may be different from choice of law.

Jurisdiction is the authority a court has to hear a case. A court may have jurisdiction over an out-of-state party.

To clear away the confusion on where future disputes must be filed and what law will govern, put in forum-selection and choice-of-law clauses in the contract.

The law of a forum state only governs a dispute if the parties have significant contacts with the state whose law is to be applied. Otherwise, the court may decide that it’s proper to apply the law of another state, one that has significant contacts with the parties. See Allstate Ins. Co. v. Hague, 449 U.S. 302, 312-13 (1981) (noting that a forum state’s law should not necessarily be used; for the selection of a state’s law to be constitutionally sound, the state “must have a significant contact or significant aggregation of contacts, creating state interests, such that choice of its law is neither arbitrary nor fundamentally unfair”). ↩

See International Shoe Co. v. Washington, 326 U.S. 310, 316 (1945) (holding that an out-of-state corporation could be served within a state if it has a “presence” in the state; sufficient presence requires “minimum contacts,” such that they would meet rules of “fair play” and “substantial justice”). ↩

Id. at 313 (the Delaware-incorporated business with its principal place of business in Missouri had minimum contacts with the state of Washington, as it had a manufacturing plant there and employed salesmen there who sold to Washington residents). ↩

See Burger King Corp. v. Rudzewicz, 471 U.S. 462, 478 (1985) (a Burger King franchisee based in Michigan was brought to court in Florida, where Burger King was based, despite never having been to Florida; the court ultimately decided that the contract by itself did not give the Florida court jurisdiction over the individual, but defendant’s actions did). ↩

Id. at 463 (finding that defendant could be called into the forum state of the other party because of the “substantial and continuing” relationship with the other party, the contract terms having been negotiated, and fair notice that defendant could be brought into that forum state). ↩

See Carnival Cruise Lines, Inc. v. Shute, 499 U.S. 585, 592-5 (1991) (a couple had waived their rights on where to sue when signing a contract to join a cruise; the court held that these forum-selection clauses are on their face valid and presumed to have been negotiated for). ↩

Id. at 595 (these waivers are presumed to be valid, though courts will examine them for fairness–if there was fraud or bad faith, or if no notice was given). ↩

Vinay Jain

As Chief Legal Officer, Vinay serves as Shake's general counsel, is responsible for the company's legal contracts and content, and leads efforts to educate consumers and small businesses about the law.